Please Help!! 1. BMT has developed a new product. It can go into production for
ID: 2714402 • Letter: P
Question
Please Help!!
1. BMT has developed a new product. It can go into production for an initial investment of $4,000,000. The equipment will be depreciated using straight-line depreciation over 4 years to a value of zero. The firm believes that net working capital at each date will equal 25 percent of next year’s forecast sales. The firm estimates that variable costs are equal to 40% of sales and fixed costs are $500,000 per year. Sales forecasts in dollars are below. The project will come to an end after 4 years, when the product becomes obsolete. The firm’s tax rate is 35 percent, and the discount rate is 9 percent. Calculate the NPV.
Year 0 1 2 3 4
Sales forecast (in $): 0 2,800,000 3,400,000 3,700,000 4,200,000
(a) Calculate the NPV.
2. From the problem above, perform sensitivity analysis on the following assumptions and find the revised NPV
(a) sales are 10% lower each year than predicted above
(b) the discount rate is 12 percent
Explanation / Answer
Initial Investment 4000000 Depreciation over 4 years (4000000/4) 1000000 Computation of cash flows over the period of 4 years Particulars Year 1 Year 2 Year 3 Year 4 Sales 2800000 3400000 3700000 4200000 Less: Variable cost @40% 1120000 1360000 1480000 1680000 Less: Fixed Cost 500000 500000 500000 500000 Income before tax 1180000 1540000 1720000 2020000 Less: Tax @35% 413000 539000 602000 707000 Net Income 767000 1001000 1118000 1313000 Depreciation Tax Shield (Depreciation*Tax rate) 350000 350000 350000 350000 Net Cash Inflow 1117000 1351000 1468000 1663000 Net working capital required (25% of Next year sales) 850000 925000 1050000 0 Net Inflow 267000 426000 418000 1663000 Computation of NPV Year Cash Flow Present Value factor@9% Present Value 0 -4000000 1 -4000000 1 267000 0.9174311927 244954.1284 2 426000 0.8416799933 358555.6771 3 418000 0.7721834801 322772.6947 4 1663000 0.7084252111 1178111.126 NPV -1895606.374 Under second scenario Computation of cash flows over the period of 4 years Particulars Year 1 Year 2 Year 3 Year 4 Sales 2520000 3060000 3330000 3780000 Less: Variable cost @40% 1008000 1224000 1332000 1512000 Less: Fixed Cost 500000 500000 500000 500000 Income before tax 1012000 1336000 1498000 1768000 Less: Tax @35% 354200 467600 524300 618800 Net Income 657800 868400 973700 1149200 Depreciation Tax Shield (Depreciation*Tax rate) 350000 350000 350000 350000 Net Cash Inflow 1007800 1218400 1323700 1499200 Net working capital required (25% of Next year sales) 765000 832500 945000 0 Net Inflow 242800 385900 378700 1499200 Computation of NPV Year Cash Flow Present Value factor@12% Present Value 0 -4000000 1 -4000000 1 242800 0.8928571429 216785.7143 2 385900 0.7971938776 307637.1173 3 378700 0.7117802478 269551.1798 4 1499200 0.6355180784 952768.7031 NPV -2253257.285